By Vivek Mishra
The place of performance of services was the most disputed issue, next only to classification disputes, of the erstwhile regime of service taxation. After introduction of the negative list and definition of service’ per se, the introduction of the Place of Provision of Service Rules, 2012, (PoPS’ rules) seems to be a more scientific approach to determine the location of services. The PoPS rules combined with the concept of taxable territory’ have comprehensively replaced the imports and export rules prevalent in the erstwhile regime of service taxation.
However, there are a few grey areas under PoPS, which require clarification. To start with, the term intermediary’ has been defined to mean a broker or an agent who arranges or facilitates a provision of service between two or more persons, but does not include a person who renders the main service on his account. The term main service’ is not very clear in a number of cases.
Typically, the services provided by call centres, BPOs, KPOs and even the marketing agencies seem to fall within the description of main service’. This is because these services are performed on a principal-to-principal basis and are remunerated on a basis other than a commission on sales effected. However, these services clearly also have a level of intermediation in the sense that there are 3 parties involved in the transaction.
This can be quite easily remedied by issuing a clarification on such services, hopefully one saying that these are not intermediary services.
Rule 7 of the PoPS rules determines the place of provision in case of services provided at multiple locations. This rule seems to be more relevant to a GST scenario where the jurisdiction for collection of tax (state GST) needs to be determined on a state-by-state basis. However this provision has a significant impact on export of services, possibly unintended.
The provision essentially covers what should the place of provision be in cases where a service is provided in more than one location, including in the taxable territory. Rule 7 says that the place of provision would be that place in the taxable territory where the greatest proportion of the service is provided. Let’s see how this rule would operate in the following situation. Let’s imagine that a service is provided to the extent of 97 per cent outside India, two per cent in Mumbai and one percent in Delhi. In this case, the place where the greatest proportion of the service in the taxable territory would be Mumbai. However, undoubtedly the greatest proportion of the service is provided outside India. Therefore, the rule is worded in such a manner that if any portion of any service under rules 4, 5 or 6 is provided in India, it would be taxable in India. This does not seem to be completely logical.
Another possibly unintended outcome resulting in denial of export benefit to technical testing of goods services occurs due to rule 4.
Rule 4 specifies the location of actual performance as the place of provision for services performed in relation to goods which need to be physically made available to the service provider. This essentially means denial of export benefits to technical testing services.
However, technical testing services are essentially advisory services. The goods are subject to testing and then destroyed or otherwise disposed of. The client’s interest is in the report that carries the results of the testing, rather than in the goods that are subject to testing. Therefore, a whole industry that carries out testing of goods is now denied the benefit of export of services. Possibly the intention of rule 4 was to cover services like repair and maintenance, where the intention is that work is performed on goods and these goods are taken back by the client. Therefore, this rule may, in our opinion, require a redraft.The PoPS rules also introduced the term fixed establishment’ which is of wide import as far as the determination of location of service provider’ and location of service recipient’ is concerned. This term is not defined anywhere in the service tax Act or Rules. However, a reference can be drawn from the guidance provided in the education guide. It specifies that the fixed estab lishment should be characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to enable it to provide or receive services.
It would be of great benefit to service providers if this definition were incorporated in the Finance Act, and fleshed out to a considerably greater extent. Overall, service tax is collectible from either the service provider or from the service recipient, in some specialised cases, such as import of services.
Therefore, the service tax authorities can define a fixed establishment as one which is in place for at least 12 months, so as to avoid a large amount of litigation covering marginal situations.
(Supported by Tajinder Singh) The author is Leader, Indirect Tax Practice PricewaterhouseCoopers Pvt Ltd Email: email@example.com